A Time When Limitations Has No Effect – The Recoupment Defense
April 4, 2023
In this Surety Today blog post we discuss a situation where the statute of limitations has no effect. On occasion, a surety will become involved in a default situation where the principal may have had some good claims (I know, it’s like a unicorn or a yeti, but they can exist), but the principal failed to assert those claims in a timely fashion and they are now barred by the statute of limitations. But, just because those claims can no longer be used to seek affirmative recovery because they are time barred, does not mean that those claims cannot still be of some use to the surety. That’s right, those barred claims can still be used as defenses! Thanks to the fact that the surety has that one size fits all pair of feet, the surety can stand in the shoes of its principal and assert the principal’s erstwhile affirmative claim as a recoupment defense.
Let’s start at the beginning. In Suretyship, the liability of a surety is coextensive with that of the principal. JJK Grp., Inc. v. VW Int’l, Inc., No. CIV.A. TDC-13-3933, 2015 WL 1459841, at *13 (D. Md. Mar. 27, 2015). In Hartford Accident & Indem. Co., the Court observed that “[b]ecause it is a ‘cardinal rule of the surety/principal relationship that a surety occupies the shoes of its principal,’ [citations omitted], in general, the surety’s liability on the payment bond is ‘defined by the liability of the underlying contract,’” Id., 168 F. Supp. 3d at 832. The court continued “the surety on a Miller Act payment bond is liable only to the extent that the [principal] would be liable—and the surety may avail itself of most contract defenses, . . . Id., (citing United States ex rel. Kogok Corp. v. Travelers Cas. & Sur. Co. of Am., 55 F.Supp.3d 852, 857–59 (N.D.W. Va. 2014)); see also C.J. Coakley Co. v. Fed. Ins. Co., No. CV RDB 08-2291, 2009 WL 10682456, at *2 (D. Md. Apr. 17, 2009)(surety is entitled to assert the same defenses to a claim that the principal on the bond, may assert to the claim.); Stearns, The Law of Suretyship, 7.1 (1951) (“as a general rule, the surety is not liable to the creditor unless his principal is liable, and accordingly, he may plead any defense which the principal might have used if the action had been brought against him.”). The surety on the bond “assumes only the liability of its principal.” Chasney & Co. v. Hartford Acc. & Indem., No. CIV. WDQ-14-2148, 2015 WL 3887792, at *2 (D. Md. June 22, 2015).
Numerous courts have recognized that a surety may rely on the recoupment defense of its principal in response to a claim against the surety’s payment bond. The First Circuit Court of Appeals in United Structures of Am., Inc. v. G.R.G. Eng’g, S.E., 9 F.3d 996, 998 (1st Cir. 1993) held that a surety may rely on the recoupment defense of its principal. In G.R.G., the court discussed the nature of recoupment noting that it is “a reduction or rebate by the defendant of part of the plaintiff’s claim because of a right in the defendant arising out of the same transaction.” Id. Recoupment, is not a mechanism which reduces mutual debts “for the sake of convenience,” but rather is “in the nature of a defense” and is intended to “permit … judgment to be rendered that does justice in view of the one transaction as a whole.” Id. at 999 (citing Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299 (1946).
The court in G.R.G. observed:
The Miller Act seems to us to offer another situation in which one should distinguish setoff from recoupment. The language of the Act permits a supplier to recover, not the full contract price, but the “sums justly due him.” 40 U.S.C. § 270b(a). In our view, the aim of recoupment, “do[ing] justice in view of the one transaction as a whole,” Rothensies, 329 U.S. at 299, 67 S.Ct. at 272, would seem to match the statute’s requirement of determining the sums “justly due” a supplier, making recoupment an appropriate defense in Miller Act cases. Indeed, we do not see how the full contract price of goods supplied can possibly be “justly due” a person who supplied defective goods.
G.R.G. Eng’g, S.E., 9 F.3d at 999.
The court further noted that the policies underlying the Miller Act seem to permit recoupment because the protection of the Act “does not include payments to which the supplier’s underlying contract does not entitle him” and claims are subject to reduction for “defective articles or work.” Id. at 999. The court stated “[n]or do we understand how permitting a general contractor to reduce a supplier’s claim by the amount that the general contractor spent remedying the supplier’s failure to comply with his contract somehow ‘unduly burdens’ the supplier’s Miller Act rights. . . . On the contrary, disallowing recoupment would seem to give the supplier ‘rights’ to which his contract does not entitle him.” Id. at 999-1000.
The G.R.G. court held “[f]or these reasons, we conclude that the general contractor in this case is entitled to assert a recoupment type of defense. Insofar as GRG shows that United delivered defective goods that failed to meet contract specifications, and proves reasonably foreseeable damages caused by those defects, GRG may reduce the award to United by the amount of those damages.” Id. Hence, a surety company standing in the shoes of the contractor is entitled to recoup the value of any defective or incomplete performance. See also U.S. ex rel. Tennessee Valley Marble Holding Co. v. Grunley Const., 433 F. Supp. 2d 104, 116–17 (D.D.C. 2006); United States for use & benefit of Triple S Alarm Co. v. Westfield Ins. Co., No. 4:10CV01505 SWW, 2011 WL 13233955, at *5 (E.D. Ark. Sept. 28, 2011), aff’d sub nom. U.S. ex rel. Triple S Alarm Co. v. Westfield Ins. Co., 501 F. App’x 607 (8th Cir. 2013); United States ex rel. Andrews Marine Services, Inc. v. United Surety & Indemnity Co., No. 04–1135, 2005 WL 1308919 (D.P.R. June 1, 2005), United States ex rel. Ascher Bros. Co. v. American Home Assurance Co., No. 98–C–995, 2003 WL 1338020 (N.D. Ill. Mar. 18, 2003), United States ex rel. Hussmann Corp. v. Fidelity & Deposit Co. of Maryland, 999 F. Supp. 734, 747–48 (D.N.J. 1998); United States for Use & Benefit of Seedorff Masonry, Inc v. Archer W. Constr., LLC, No. 8:18CV21, 2019 WL 12313381, at *4–5 (D. Neb. Aug. 20, 2019)(“it is well-accepted that a subcontractor’s recovery under the Miller Act may be limited if a contractor seeks to recoup losses caused by the subcontractor under the subcontract.”); U.S. ex rel. James B. Donaghey, Inc. v. Dick Corp., No. 3:08CV56 MCR MD, 2010 WL 4666747, at *3 (N.D. Fla. Nov. 9, 2010)(“if there has been a default by the subcontractor, the general contractor may assert recoupment or setoff as a defense.”); United States for Use & Benefit of Ash Equip. Co. v. Morris, Inc., No. 4:14-CV-04131-LLP, 2017 WL 2062860, at *4 (D.S.D. May 12, 2017)(agreeing with the First Circuit recoupment analysis); H.B. Zachary Co. v. Travelers Indem. Co., 391 F.2d 43, 48 (5th Cir. 1968) (recognizing nonperformance as a defense to a Miller Act claim).
So, clearly, the surety has the right to assert a recoupment defense, but what if limitations has run on the claim that the surety wants to use for recoupment? The Supreme Court in Reiter v. Cooper, 507 U.S. 258, 263–64, 113 S. Ct. 1213, 1217–18, 122 L. Ed. 2d 604 (1993) held that “[r]ecoupment claims are generally not barred by a statute of limitations so long as the main action is timely.” Id. (citing Bull v. United States, 295 U.S. 247, 262, 55 S.Ct. 695, 700, 79 L.Ed. 1421 (1935); 3 J. Moore, B. Ward, & J. Lucas, Moore’s Federal Practice ¶ 13.11 (1992). In Reiter, there was a dispute between a motor carrier and a shipper regarding rates. The defense that the rates at issue were unreasonable was a claim that would have been barred by the applicable limitations. Nevertheless, the Court permitted the claim as a recoupment defense. The Supreme Court later reached the same result in United States v. Western Pacific R. Co., 352 U.S. 59, 71, 77 S.Ct. 161, 169, 1 L.Ed.2d 126 (1956), holding that limitations did not prohibit a shipper from asserting “by way of defense” unreasonable-rate claims against a carrier seeking to collect on previous shipments. Id. Indeed, the Fifth Circuit has observed that “because recoupment is in the nature of a defense, it is never barred by the statute of limitations so long as the plaintiff’s main action itself is timely.” Distribution Servs., Ltd. v. Eddie Parker Ints., Inc., 897 F.2d 811, 812–13 (5th Cir. 1990).
Under Maryland law, “recoupment is an equitable principle and, as such, is a rule of fairness. . . . it may be interposed to reduce or eradicate an adverse claim arising out of the same transaction, even when based on a claim that otherwise would be barred by a statute of limitations or that could not be affirmatively sought against the adverse claimant.” See Pines Plaza v. Berkley Trace, 431 Md. 652, 674 (2013); see also Baltimore Cnty., Md. v. Connecticut Gen. Life Ins. Co., No. CIV. CCB-05-511, 2006 WL 1996402, at *6 (D. Md. July 14, 2006); Ramada Franchise Sys., Inc. v. Capitol View II Ltd. P’ship Venture, 132 F. Supp. 2d 358, 363 (D. Md. 2001)(citing Egan–Ryan Mechanical Co. v. Cardon Meadows Development Corp., 169 Ariz. 161, 818 P.2d 146, 156 (1991)(“Under the doctrine of recoupment, a judgment may be reduced or eliminated, even where the claim cannot be a basis for affirmative relief.”)).
In Connecticut Gen. Life, supra., the court, quoting Imbesi v. Carpenter Realty Corp., 744 A.2d 549, 557 (Md. 2000), stated “[w]e agree with the weight of authority that a claim in the nature of a recoupment defense survives as long as the plaintiff’s cause of action exists, even if affirmative legal action upon the subject of recoupment is barred by a statute of limitations.” Connecticut Gen. Life, 2005 WL 8174368, at *1 Id. at 557 (quoting Minex Resources, Inc. v. Morland, 467 N.W.2d 691, 699 (N.D. 1991)).
The moral of the story is – don’t give up on those good principal claims even if the statute of limitations has expired, you might still be able to put them to good use.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.